Japan has a 200% Debt to GDP ratio. It finances 50 cents of every dollar spent by the government, mostly on social security payments to its rapidly aging population. That’s unsustainable, right?
It sure looks it.
But Japan has a large pool of savings to fall back on, unlike its American friends across the Pacific.
One day, those savings will be exhausted, but not any time soon.
Japanese forex reserves stand at $1.2 trln and give Japan a bit of time to get their financial house in order.
Last night the Diet voted to double the consumption tax from 5 to 10% in two steps by 2015. If the bill receives final passage into law, it would be the first major hike in the tax since 1997 when the tax was raised from 3% to 5%.
The Japanese economy promptly went into reverse in 1997, though you can’t blame the tax hike alone. Those were the bad old days with zombie Japanese banks and the Asian financial crisis.
The problem with most tax hikes is that they rarely produce the revenues forecast. Underground markets develop to avoid high taxes (just ask the Greeks) and the coffers never fill as much as the politicians expect. But you do get the unintended drag on the economy.
So far, JPY has retained its tendency to rise amidst bad domestic news rather than fall. This is a a result of overseas assets stashed away in the days of milk and honey being repatriated to retain Japan’s high standard of living.
One day the JPY will weaken materially as Japan’s fiscal chickens come home to roost. But I don’t see an immediate collapse in the JPY despite the tax hike and the subsequent political turmoil that is expected as much of the ruling DPJ is expected to split off into a splinter party.
USD/JPY is notoriously difficult to forecast based on fundamentals but I’ll hazard a guess that bad domestic news will be JPY supportive for the foreseeable future.